It’s safe to say that the short-term rental market successfully weathered the pandemic. Though the market took a hit as countries closed their borders to tourists and other travelers, a Technavio report suggests that the vacation rental market is poised to grow by $62.97 billion USD from 2019 to 2024. It shouldn’t be surprising, then, that many savvy investors looking to expand their property portfolios–or to build one in the first place–are interested in purchasing new condos, houses, or other dwellings to take advantage of this reinvigorated market. With purchasing activity high, so is the interest in short-term rental loans and the landscape of options to help investors secure financing for their purchase.
In many ways, becoming a short-term rental owner and operator has never been easier. The market is full of platforms that make it easy for owners to list their properties, such as Airbnb and Homestay, as well as consultants who make it easy for aspiring short-term rental investors to navigate the necessary paperwork and policies. Rabbu helps in other ways: we automate all parts of the process, from sourcing new investments, getting them rental-ready, operating them and maximizing owner’s revenue, to providing transparent financials and insights every step of the way.
Of course, it’s always crucial to view these developments in light of how the economy as a whole is faring. The prices of condos and houses have recently reached new heights, with some even calling this a global housing boom. So, while tech has simplified nearly everything about the process of setting up short-term rentals, other macroeconomic factors may make it more difficult to afford them. There’s no need to despair, however: as the short-term rental market has grown, so too has the number of new short-term rental loan and financing options.
Despite the growing proliferation of short-term rental properties, traditional financial institutions have been reluctant to provide mortgages for them. This is partly because banks are notoriously conservative organizations and the short-term rental world is a relatively new field. Another reason, according to some experts, is that banks have traditionally shied away from giving out loans to rooming houses, which is what some properties could be considered if individual rooms are rented out.
Banks may be concerned with risks associated with an investment that relies on people keeping their reservations—if a person cancels, then the owner may not have the funds to make a payment. They may believe that renters might be inclined to take less care of a short-term rental than they would of their primary residence, which can lessen the property value.
Though traditional banks and financial institutions are notoriously conservative, slow-movers with new asset types, new-to-market lending companies are bridging the gap for investors – an especially exciting option for both new and established short-term rental owners alike.
A great example of this is Host Financial, which offers several unique loan options. These loans can apply to many different types of dwellings–from single family homes to multiplexes–and cover every stage of a property’s lifespan, from construction through renovations and sales, and they even offer a short-term rental specific loan offering.
Host’s approach differs from that of traditional financiers, as it looks at the income that is or could be generated by the property, rather than the income of the individual, when deciding on whether to approve a loan. These types of loans, called DSCR loans (or debt service coverage loans), enable individuals to apply for loans without having to provide the extensive documentation– including tax returns, W2’s, and DTI (debt to income ratios)–traditionally required in order to be considered for mortgage applications. This enables, for example, self-employed individuals, who may otherwise struggle to secure a bank loan, to more easily enter the market.
Host uses three different metrics to determine their financing: market rental rates, a year or more of short-term rental income from the property, and projected short-term rental income. This means that Host takes both the true value of a property and the amount of money it can make for an owner into account. This kind of flexibility and forward thinking is beneficial for small-scale owners looking to buy their second property as well as large-scale owners looking to expand. In both cases, entrepreneurs can take advantage of a hot real estate market and a recovering tourism industry.
When traditional financiers shy away from new kinds of ventures, entrepreneurs are free to explore the new options that are shaking up the market. Private financiers, particularly those with knowledge about the ever-changing nature of tech and innovation, are filling the funding gaps left in the short-term rental field. Adopting the latest PropTech solutions gives them access to a wealth of accurate and dynamic data, making them uniquely adaptable both to the ever-changing market and to each individual customer’s needs.
At Rabbu, we’re especially attuned to the shifting needs of short-term rental owners and operators, as we work with them every day. If you’d like to pursue securing financing with Host Financial, please leave your details at this link, otherwise submit your information below and we will be in touch!
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